The Brexit vote took many by surprise. How can FP&A help their organization prepare for the uncertainty that ensued in the aftermath of the vote?
Don’t overreact. Brian Fink, president of consultancy Evolve Associates, cautions FP&A teams not to go overboard by materially modifying business plans for the U.K., as the actual economic impact of Brexit will likely be minimal in the near term. “It seems that both the Brits and the Europeans are predisposed towards letting the situation play out slowly over the next two years, and are unlikely to push for any major changes in the immediate future,” Fink said. “Bottom line, stay cool and let the situation play out to the point where possibilities become probabilities.”
Run a short and medium-term budget/forecast assessment. According to Kayla Xhuveli, director of FP&A at ABM Industries, FP&A needs to go through a quick checklist, which may include:
- Assess impact on revenues/profit as a result of economic slowdown in the U.K. and unknown change in access to European markets
- Assess impact of FX degradation as a result of the weakening British pound for business operations in the U.K.
- Quantify potential favorable impact of lower U.S. interest rates on variable-rate debt
- Work closely with treasury to get the latest long-term FX rates and interest rates in the market, update forecast models accordingly, and partner with treasury and consider utilization of derivatives to mitigate risk.
- For companies that require ongoing financing, consider the health of banks that the company has counterparty relationships with and assess the risk of lower funds available for borrowing
- Consider short and long-term tax implications.
Consider near-term financial risk. Indeed, FX fluctuations pose the most immediate risk to planning, according to Fink, and that’s the impact of the vote on the value of the British pound relative to the U.S. dollar. “Expect rates to continue to be volatile as the situation unfolds,” Fink said. Eric Carlisle, senior director of FP&A at Alliance, said his company’s direct U.K. exposure is not very large, but it does have sales associates throughout Europe, with a Netherlands-based business unit that does business in England. Like many other companies, Alliance creates a composite rate based on consensus data for planning purposes. That rate will depends on what market experts say about where the pound is headed.
Identify specific drivers. “Brexit is an event that impacts other common levers you would think about in macro terms,” said Bryan Lapidus, FP&A, Associate Director, CFO Advisory at Allegiance Advisory Group, “including interest rates, GDP growth, consumer confidence, etc.” That means that on a micro-scale, “You would need to map the exposure to your operations and to your financials, including financial services, supply chain, customer in market, etc. With so much still unknown, updating the entire forecast is very hard.”
Run what-if analyses. “Given the uncertainty immediately associated with the Brexit decision, it’s imperative that FP&A performs comprehensive ‘what-if’ analysis around all potential future scenarios,” says Philip Peck, Vice President of Financial Transformation at Peloton. “This should also include robust contingency planning around these scenarios and the development of playbooks that provide a blueprint for action as the business environment changes over time.”
Look at historical tariffs and trade restrictions. The vice president of FP&A at a manufacturing company recommends looking at past EU policies regarding tariffs and import restrictions to get some ideas on what the future might hold. When creating a long-term forecast, “I would then compare that to the current policy as a baseline and develop different sales impact scenarios,” he said. “If the tariffs were much higher in the past it could negatively impact future sales. It’s better to know this now so that you could look at allocating efforts to more favorable markets or look to make the cost of production even lower (with a target in mind over and above continuous improvement) to offset potential cost increases from the customer’s perspective.”
Stay agile. Øyvind Strand, Business Domain Responsible Finance, HR and CRM – Business Intelligence Competency Centre at DNVGL, recommends that FP&A stay nimble by relying on scenario analysis to chart out possible ways Brexit would impact the company’s financial performance. “It’s the best way to handle these microchanges,” Strand said. He added that the other tool is rolling forecasting because it’s fit to adapt to fast-occurring changes, compared to the massive reforecasting efforts required by more traditional approaches. At DNVGL, the finance team practices what it calls dynamic forecasting to stay on top of changing conditions. “It provides us with a rolling long-term view of the future while at the same time giving us the flexibility we need to adapt to internal and external changes,” he said. He recommends that companies avoid traditional budgeting methods and focus more, instead, on the real situation out in the business.